Becker CPA Review 2010 Financial 6 Update

Financial 6
Updates for 2010 Edition Last Updated January 15, 2010

SECTION A: TEXT AND LECTURE ERRATA Item A.1 Page F6-12, EXAMPLE In the example, the question should read as follows (changes highlighted): What is the over(under) funded status of each pension plan and what amounts should be reported as noncurrent asset, current liability, and noncurrent liability on ABC's December 31, 20X9 20X8 balance sheet

Item A.2 Page F6-23, Item III.A. INCOME STATEMENT FORMULA The SIRAGE formula here should read as follows (changes are highlighted):

CURRENT SERVICE COST INTEREST COST (on APBO) <EXPECTED (OR ACTUAL) RETURN ON PLAN ASSETS> AMORTIZATION OF PRIOR SERVICE COST <GAIN> LOSS AMORTIZATION AMORTIZE/EXPENSE TRANSITION AMOUNT (NET OBLIGATION) NET POSTRETIREMENT BENEFIT EXPENSE

This formula should be consistent with the pension SIRAGE formula on pg. F6-7.

Item A.3 Page F6-24, Item C.3. <Actual Return on Plan Assets> This item should be titled "<Expected (or Actual) Return on Plan Assets> and should stated the following: GAAP allows companies to use either the expected or actual return on plan assets to calculate net postretirement benefit cost. Expected return on plan assets is calculated as the beginning fair value of plan assets times the expected long-term rate of return. Actual return on plan assets is based on the difference between the fair value of plan assets at the beginning and end of the period, adjusted for contributions and benefits payments.

Item A.4 Page F6-24, Item C.5. <Gains> and Losses This item should be titled "<Gain> Loss Amortization" and should read as follows:

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Becker CPA Review 2010 Financial 6 Update

Gains and losses arise from two sources: (i) The difference between expected and actual return on plan assets when expected return on plan assets is used in the calculation of net postretirement benefit expense. (ii) Changes in the APBO due to changes in assumptions or experience. The amortization of postretirement benefit plan gains and losses is calculated in the same manner as the amortization of pension gains and losses described on the bottom of pg. F6-9, using the APBO rather than the PBO in the calculation.

Item A.5 Page F6-24, Item C.6. Amortization or Expense of the Transition Obligation The box at the bottom of pg. F6-24 is incorrect. The box states that the "minimum amortization" is calculated by dividing the initial unfunded amount by the greater of 20 years or the average employee job life. Above the box, the text states the following: (2) Delayed recognition by using straight-line amortization over the average remaining service period of active plan participants. If this period is less than 20 years, a 20-year amortization period may be elected. The "average employee job life" used in formula in the box is not the same as the "average remaining service period" described in the text. Under postretirement benefit accounting, the "service period" is the attribution period, which extends from the date hired to the date the employee is fully eligible for the postretirement benefits. This service period is generally shorter than the employee's job life. The box at the bottom of pg. F6-24 should read as follows (changes highlighted):

Accumulated postretirement benefit obligation (at adoption of SFAS 106) <Fair value of plan assets> Initial unfunded amount 20 years OR avg. employee job life remaining service period (greater of) Minimum amortization OR Expense full amount

SECTION B: PASSMASTER, SIMULATIONS & QUIZZES ERRATA None

SECTION C: TEXT AND LECTURE ADDITIONAL OR ENHANCED INFORMATION None

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Becker CPA Review 2010 Financial 6 Update

SECTION D: PASSMASTER, SIMULATIONS & QUIZZES ADDITIONAL OR ENHANCED INFORMATION

Item D.1 F6 Simulation, Research Tab The requirement is to Locate the authoritative support for accounting for deferred taxes where there is a change in the enacted tax rate. The solution indicates that the answer is found in SFAS No. 109, Paragraph 27. Paragraph 27 is as follows: Deferred tax liabilities and assets shall be adjusted for the effect of a change in tax laws or rates. The effect shall be included in income from continuing operations for the period that includes the enactment date. This answer is in the Original Pronouncements section of the database (called the FASB-OP). If you are not sure how to determine that, click on FASB Literature in the left-hand part of the search screen. FASB-OP is original pronouncements (the original material that was published; original pronouncements are arranged by pronouncement number by type of pronouncement such as APB, FASB, etc.). FASB-CT is current text (a topical arrangement of the original pronouncements where the information is supposedly updated for any changes from later pronouncements; current text is arranged by topic such as A07 for Accounting Changes and Error Corrections, E11 for Earnings per Share, and L10 for leases). Most full services used in practice have more sections than just Original Pronouncements and Current Text (RIA, for example, has Original Pronouncements, Original Pronouncements Amended, Current Text, EITF, Exposure Drafts, and many others). The service that is used on the CPA exam has more sections but not as many as a full service. So how do you arrive at the answer (the remaining discussion assumes that you are working along in the Research question)? Lets try a key word of enacted tax rate. That word is a word that is not used extensively in the authoritative literature, and it should give us something. It does. It gives 3 different hits (results) with the Becker database. Two of the hits could be the answer. The first hit is the one called FAS 109 Par. 27 and is from FASB-OP. The second hit is the one called I27 Par 126 and is from FASB-CT. Both of them are about Enacted tax laws or rates. Which one should be used? If we look at them, other than for references, they are the same, so theoretically, either one could be used. The solution says to use the FASB-OP one (FASB 109 paragraph 107). In this case, it does not make any difference, but it could, if the original pronouncement had been changed and those changes could have been reflected in the current text. If the original pronouncement had been changed, it might be appropriate to use the current text one. Depending on the specific question, there are various approaches to finding the answers to Research questions. We have included these comments in the various Online Updates to demonstrate most or all of the possible approaches.

Item D.2 F6 Simulation, All Tabs This question has caused some confusion. The question and answer are as follows: Question

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Becker CPA Review 2010 Financial 6 Update

The following worksheet contains key information pertaining to the Lane Company's financial statement income and the income reported on its tax returns for each of the last three years ending April 30. The tax rate changes were enacted at the beginning of each year and were not known by Lane at the end of the previous tax year. Lane Co. INCOME TAX WORKSHEET For the years ended: 4/30/20X2 $900,000 4/30/20X3 $1,000,000 4/30/20X4 $1,200,000

Pretax financial statement income RECONCILING ITEMS: Revenues Municipal bond earnings Key man life insurance proceeds Increase (decrease) in installment receivables Expenses Excess of tax return depreciation over financial statement depreciation Goodwill amortization on unimpaired goodwill of Lane's subsidiary Total reconciling items Taxable income Enacted tax rate Explanation

100,000 25,000

100,000 (25,000)

75,000 100,000 (50,000)

100,000 50,000 275,000 625,000 20%

125,000 50,000 250,000 750,000 25%

75,000 50,000 250,000 950,000 30%

Refer to the actual answer in Passmaster for the explanation. Comments On Page F6-34, temporary differences are defined as the "the differences between the tax basis of an asset or liability and its reported amount in the financial statement that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively." Measurement of deferred taxes is based on the applicable tax rate. On Page F6-38, the applicable tax rate requires using the enacted tax rate expected to apply to taxable items (temporary differences) in the periods the taxable item is expected to be paid (liability) or realized (asset), i.e., use the tax rate in effect when the temporary difference is to reverse. For this question, that appears to be the 20%, 25%, and 30%. If Lane knew about the future enacted tax rates, it would use those rates in establishing the deferred taxes that would reverse in a particular year. For example, it would use 25% for any differences that originated in 20X3 and that were expected to reverse in 20X4 and 30% for any differences that originated in 20X3 and that were expected to reverse in 20X5. Instead, it is using 20% for all differences that originated in 20X3, regardless of when those differences might reverse. The reason for this use is that the question states "The tax rate changes were enacted at the beginning of each year and were not known by Lane at the end of the previous tax year." So the use of the given yearly tax rate does seem to be appropriate (because it is the only known tax rate at the end of the year). The change in the tax rate is automatically taken into account by using the new tax rate to determine the deferred tax liabilities. For example, in 20X3, the cumulative temporary differences are $325,000, and the cumulative deferred tax liabilities are $81,250, taking into account the new tax rate of 25% on the cumulative deferred tax liabilities. The deferred tax expense for 20X3 is
4

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Becker CPA Review 2010 Financial 6 Update

the cumulative deferred tax liabilities of $81,250 less the previous year's cumulative deferred tax liabilities of $35,000, or $46,250. The same kind of plug approach is illustrated in the Example on Page F6-41. --NGE IN EDITORS COMMENTS Note: From time to time, we issue a PassMaster updater that updates your PassMaster questions and answers. Normally, error corrections to at least some of the question are included in the updater. Thus, if you have run the updater, some of the errors discussed above may already have been corrected. We do not update the online documents when a PassMaster updater is available because not everybody runs them (although they should). Some of the Items above have come from our internal review process, some have come from questions and comments from Becker instructors around the world, and some have come from questions asked by various candidates, either from Becker KnowledgeBase or in online or live classes. We wish to thank all of these individuals as a group for their efforts to improve our materials.

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